Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity.com: "

The days of low volatility and central banks working in tandem as a backdrop for global markets may be a thing of the past—and that could be troublesome for investors that have loaded up on risk, which, these days, is most investors.

Funds to watch

Fund

Ticker

Metropolitan West Total Return Bond

MWTRX

Pimco Total Return

PTTAX

First Eagle Global

SGENX

American Funds New World

NEWFX

Oppenheimer Developing Markets

ODMAX

Source: Barron's

For the past decade, investors have become increasingly comfortable in riskier areas of the market—this is especially true of fixed-income investors, who have gone more aggressively into high-yield bonds and emerging-market debt in search of yield, as well as investors interested in international stocks. As the global backdrop becomes bumpier, however, those investors may be in for a shock.

So what to do? Some overlooked funds may have the answer. These funds pay more attention to risks in the market, which has held them back in a 10-year bull market that has charged past any fears, but will likely allow them to outperform if markets get messier.

Morningstar helped us identify funds that have held up better than peers during downturns. We looked at a 15-year period, in order to gauge their performance into and through the crisis, not just coming out. Taking just a decade-long view would likely turn up funds that did exceptionally well by taking on risk during a period of abnormally calm markets and accommodative central bank policies—especially in the bond market, says Morningstar analyst Sarah Bush. And that may not be the type of risk-taking investors want as rates rise and global growth slows.

What’s more, the metrics often used to evaluate the risks of a mutual fund can send the wrong message. For example, bond funds that hold relatively illiquid debt often have higher Sharpe ratios, an indication a fund gets better risk-adjusted returns for the risk it is taking. But Bush says the ratio underestimates the risk from holding bonds that don’t trade very often, making selling them difficult. Illiquidity is one of the risk investors are worried about right now.

Similarly, a downside capture ratio shows how much of a decline a fund suffered relative to its peers or the market as a whole. But this metric can also lead bond investors astray: When it’s used against the Barclays Capital Aggregate Bond index, it focuses on interest rate risk, not credit risk. As a result credit-heavy funds look good. For example, Putnam Income has a low downside capture ratio, suggesting it lost less than peers in downturns. However, Bush says it suffered a whopping 20% in 2008. A better gauge is using maximum drawdowns— the worst loss a fund suffered, Bush says.

Two funds that have adeptly navigated interest rate and credit risk, according to Bush, are Metropolitan West Total Return Bond (MWTRX) and Pimco Total Return (PTTAX).

The $70 billion Metropolitan West Total Return Bond Fund (MWTRX) beat 96% of its peers over the last 15 years. After being conservatively positioned for several years, the fund has started adding some risk by buying high-quality corporate bonds during the selloff, including the senior debt of banks like Lloyds Banking Group (LYG) and Banco Santander (SAN) that have been beaten up amid concerns about Brexit.

The fund still has about half its assets in either cash or government-guaranteed, liquid securities, while the other half is largely in higher quality bonds. One reason the fund’s managers are treading carefully is because the debt build-up on corporate balance sheets could contribute to more volatility as interest rates rise and economic growth slows and some companies struggle to service their debt. “We are in the beginning phases of a sea change in market attitude, which is going from a quantitative easing era where investors would assume the best of the market or a credit to now assuming the worst,” says co-manager Bryan Whalen. “It’s likely to get worse before they get better.”

One potential trouble spot is leveraged loans, because the covenants that protect lenders in a bankruptcy have been weakened in recent years, potentially leaving bond holders with bigger declines than they thought were possible.

Investment-grade bonds also pose a surprising amount of risk. The BBB-rated part of the market has exploded to almost $3 trillion. Historically, 20% to 45% of the BBB market has been downgraded in periods of turmoil, which could mean $1 trillion of investment-grade bonds become high yield—an amount that would ripple through the entire bond market, Whalen says

Global markets have had more bumpiness in the last decade, offering a recent window into how a fund may perform. Two global funds with strong risk-adjusted returns over the last 15 years that lost less than peers in their worst years and that are conservatively positioned include the First Eagle Global Fund (SGENX), which has a large-cap value bent and will hold cash or gold, last about 8% of assets, when attractively priced opportunities are scarce. The American Funds New World (NEWFX) tends to be less volatile than emerging market peer because it also holds developed market stocks that do business in emerging markets—a group that made up more than half of assets as of its last quarterly report.

The Oppenheimer Developing Markets (ODMAX) fund ranks the best in terms of strong 15-year risk adjusted returns and other risk metrics even though manager Justin Leverenz isn’t conservative in the typical sense. But he focuses on companies with competitive advantages and long-term growth prospects, including global companies with sizable emerging markets business, like Kering, the French home of brands like Gucci. Leverenz has also sidestepped problem spots like Turkish banks. Though Leverenz is still underweight China versus the benchmark, he has been buying beaten-up Chinese stocks, focusing on domestically-oriented companies in areas that will continue to grow despite an economic slowdown and continued conflict between the U.S. and China.

Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

What Fidelity Offers

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.

These links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are separate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Links provided by Fidelity Brokerage Services

These links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are separate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Published by Fidelity Interactive Content Services

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.